SAP, Vodafone lead European stocks to fresh highs

European shares reversed early losses to close at a fresh 16-month high yesterday as hopes for rising revenues boosted blue-chips like mobile phone giant Vodafone and Europe's top software firm, SAP.

A strong start on Wall Street underpinned gains in Europe as investors backed equities to extend the rally that began in March last year and added more than 40 per cent to pan-European benchmark indexes by the end of the year.

Analysts said the smaller, lower quality cyclical stocks that led the way higher in 2003 might take a back seat as fund managers made their investment decisions early in the new year.

"We see a shift back into quality," said Robert Jukes, an equity strategist at Credit Suisse First Boston in London.

"We ended the year on a high note. January is when the new money comes in... and we think small caps have probably had their day."

CSFB favoured large-cap stocks with positive earnings momentum, such as Vodafone, he added.

Vodafone rallied 2.7 per cent after two other brokers upgraded the stock on expectations that new products would boost income, while SAP jumped 3.1 per cent after US peer Siebel Systems said higher licence revenues meant its fourth-quarter profit would beat its previous forecast.

Those gains helped the FTSE Eurotop 300 index of pan-European blue chips to end 0.5 per cent firmer at 972.95 points, its highest close since August 2002, on modest turnover of 2.2 billion euros.

The narrower DJ Euro Stoxx 50 index rose 0.4 per cent to 2,808.1 points. Gains were made despite ongoing weakness in the US dollar, which has often been cited as a key concern for European corporate earnings and stock prices.

The dollar hit fresh lows across the board as comments from a top Federal Reserve official reinforced views that US interest rates would be on hold for some time.

The euro, up by more than one-fifth against the greenback in the past year, rose to a fresh all-time high just under $1.27, while the yen hit a three-and-a-half-year peak as investors continued to fret about the wide gap in the US current account. US stocks also shrugged off the weakness in the greenback, although gold and oil prices both surged.

In New York, the blue-chip Dow Jones industrial average was 0.7 per cent higher at 10,482.0 points, while the Nasdaq Composite Index rose 1.3 per cent to 2,032.1 points, a near two-year high.

Around Europe, London's FTSE 100 edged 0.1 per cent higher, Paris's CAC-40 ended up 0.3 per cent, and Frankfurt's DAX closed 0.4 per cent firmer.

Zurich's SMI Index, which was closed on Friday when other markets rose, gained 1.7 per cent to an 18-month high as heavyweight drug maker Novartis climbed 2.5 per cent.

Along with SAP, other European software firms also benefited from Siebel's earnings upgrade, with Cap Gemini, Sage and Atos Origin all up about four per cent.

The basic resources sector was also favoured, led by a 7.9 per cent rally in Anglo-Dutch steel firm Corus following upbeat comments from broker ABN AMRO.

Contrasting fortunes in the auto sector saw Volkswagen dip 0.8 per cent after saying it would make a small loss in the US this year, while rival Porsche jumped 3.3 per cent after saying its US sales rose by a third in 2003.

Drugmakers were mostly weaker, with AstraZeneca down 2.1 per cent after US newspaper Barron's said the firm faced risks from two new drugs aimed at cutting cholesterol and strokes. Peer SkyePharma dived 6.6 per cent after saying delays in concluding a number of key deals had driven it back to a loss in 2003.